Agriculture, the Fed has been watching you

The Federal Reserve Board of Governors is expected to have its finger on the pulse of the economy, but how about on the pulse of agriculture, and its part of the U.S. economy? The Fed’s Beige Book, which is a summary of the data fed to the Fed, indicates the Federal Open Market Committee which sets monetary policy, is getting a fair picture of agriculture and the stress that the drought is having. Let’s read what is contained in the Beige Book released on August 29.

The Beige Book is named for the color of its cover, nothing more, but is published every six weeks ahead of the FOMC meeting at which interest rate policy is reviewed and adjusted. About two weeks after the meeting, the Beige Book is released to the public. The report’s chapters reflect the economic activity in each of the twelve Federal Reserve Districts, such as manufacturing activity, consumer purchases, real estate transfers and the like. Agriculture is one of those sections in each report, by some of the twelve district banks, where agriculture is a major part of the economy in its district.

Seventh District—Chicago

“The drought has substantially reduced expected yields for corn and soybeans, although the impact varied considerably across the District. Scattered rains near the end of the reporting period helped revive soybeans to some degree; however, with the exception of some late-plantings, the precipitation was too late to improve yields for most of the corn crop. Crop insurance and higher prices will partially offset lost revenue. However, some farmers face the prospect of having to buy corn at market prices after selling ahead more than they will likely harvest. Livestock pastures are in poor shape as well, and fields with low corn yields were being chopped for silage to feed livestock. With feed costs high, livestock operations cannot cover their costs of production, and operators have reduced their herds accordingly. Hog and cattle prices were down from the prior reporting period, while dairy prices were up as milk production dipped.

Eighth District—St. Louis

“Severe drought conditions have caused downgrades to forecasted crop production. Annual 2012 production of cotton, soybean, and corn in the District states is expected to fall from 2011 levels by 12 percent, 18 percent, and 24 percent, respectively. In contrast, annual production of rice and sorghum in the District states is expected to increase by at least 12 percent. The fraction of all crops rated in fair or better condition has fallen in all District states since the previous report. Similarly, the fraction of pasture rated in fair or better condition declined in all District states. The District states’ year-to-date coal production for the end of July was 3.4 percent higher compared with the same period last year. Meanwhile, the District states’ coal production for July 2012 was approximately on par with July 2011.”

Ninth District—Minneapolis

“The agriculture sector was mixed. Preliminary results from the Minneapolis Fed’s second-quarter (July) survey of agricultural credit conditions showed that nearly 90 percent of lenders said farm incomes increased or stayed the same in the past three months, with similar results for household and capital spending. While severe drought hit the Midwest, much of the District has been spared relative to other areas. Most of the corn, soybean and spring wheat crops in Minnesota and North Dakota were in good or excellent condition. South Dakota and Wisconsin fared somewhat worse. District cattle producers have been selling more animals because of high feed costs. Margins also tightened for dairy producers. Prices received by farmers in July increased from a year earlier for corn, wheat, soybeans, hay, dry beans, poultry, eggs, cattle and hogs; prices decreased for potatoes and dairy products.”

The Minneapolis Fed also reported that a Minnesota ethanol plant was idled because of high corn input costs, and a long-planned beef-packing plant in South Dakota was put on hold following reports that it would open soon.

Tenth District - Kansas City

“Agricultural conditions deteriorated as crops withered under extreme drought. The majority of the corn and soybean crops were rated in fair or poor condition, cutting production estimates and sending crop prices to record highs. Drought strained profit margins for livestock producers as feed costs rose and further herd liquidations dampened cattle prices. Escalating production costs were expected to boost farm loan demand in the coming months. Agricultural bankers indicated ample funds were available for farm loans at historically low interest rates. Loan repayment rates were expected to hold near year-ago levels due in large part to crop insurance and higher land lease revenues for mineral rights. While still well above year-ago levels, farmland values rose less rapidly and were expected to hold steady during the rest of the growing season.”

The Kansas City Fed also reported restaurant sales increased, and several contacts expected higher menu prices in coming months in response to rising food costs.

Eleventh District—Dallas

“Drought conditions improved slightly due to scattered rainfall in July. Crops remained mostly in fair to good shape, with the exception of dryland cotton crop in the Texas High Plains region which suffered due to lack of moisture. Overall, crop conditions were much better than a year ago. Drought in the Midwest has caused grain prices to climb sharply, squeezing margins for ranchers by driving up feed costs for livestock.”

Other Fed Districts provided only marginal references to agriculture, but are worth noting:

The Fourth District at Cleveland said, “There is growing concern about the rise in agricultural commodity prices and the resulting impact on the cost of food products.”

The Fifth Federal Reserve District at Richmond, VA reported, “Widespread precipitation since our last report helped revitalize crops and pastureland in many areas of the District. Rain in early August aided late summer peaches in Maryland and West Virginia, and soybeans were responding to improved weather conditions in Virginia. Cotton and peanut growers in the District are also having a great year. In South Carolina, the cantaloupe and watermelon harvest was virtually complete by early August. Results of our recent agricultural credit survey indicated that farmland values were above both the previous quarter and year-ago levels.”

The Twelfth Fed District at San Francisco reported, “Agricultural producers saw further sales gains, and extraction activity of natural resources used for energy production continued to expand. Orders and sales grew for many crop and livestock products, and one report indicated that demand for cotton was particularly strong. The persistent drought in parts of the country has raised grain and feed prices, prompting District cattle ranchers to reduce herd sizes.”

Summary:

The Federal Reserve System keeps tabs on agriculture because of its economic impact, and is quite aware of the impact of the drought on agricultural production. While yields are expected to go down, many of the losses are being covered by crop insurance. However, the loss of pasture and high feed prices have created a restructuring of the livestock sector, which the Fed is watching. The Fed is also aware of higher food prices that will affect consumer spending.